With the increase in the capital gains inclusion rate from 1/2 to 2/3 effective June 25, 2024, passive investment income could be higher in your client’s corporation. Now is the time to revisit the potential reduction to your client’s small business deduction.
What are the Changes?
The new rules set a threshold for how much passive income a Canadian-controlled private corporations (CCPC), as well as the corporations associated with it, can earn without the passive investment income reducing the corporation’s small business deduction. Basically, a CCPC can earn up to $50,000 per year and maintain the full $500,000 Small Business Deduction (SBD). Every dollar of passive income above the $50,000 per year threshold will reduce the corporation’s SBD by $5 completely eliminating it once passive income is over $150,000*.
A simple example: A business with a $1 million portfolio that generates $50,000 of passive investment income, is onside and within the threshold. On the other hand, a business with a $2 million portfolio generating $100,000, would have its SBD reduced by $250,000.
Share and Learn More
To learn more about how this will affect your client’s small business, be sure to share the client-friendly version of this article, as well as the Passive Investment Income Calculator.
For more information on the increase in the capital gains inclusion rate, read After June 25, 2024, Your Client’s Tax Liability on Death May Have Increased! Time to Revisit How to Fund the Tax Liability and if you have any questions, be sure to contact your local PPI Collaboration Centre.
*The provinces also have an SBD and mirror the federal SBD reductions for passive income. However, Ontario and New Brunswick do not mirror the federal rules with respect to the reduction to the SBD so for these provinces, there is only the federal reduction and no corresponding reduction to the provincial SBD.